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Thursday, 5 July 2012

The Manchester United IPO some initial observations

There’s been a lot written about
Manchester United’s proposed listing on the New York Stock Exchange (“NYSE”) since it
was announced on Tuesday night by the filing of an SEC Form F-1 (the document is available here), this post is
designed as a brief summary of my thoughts on the subject.

This is a massive change in
strategy by the Glazers and a positive one financially

Since the takeover, the club have
insisted that the debt loaded onto United is not in any way a problem. As
recently as last March, David Gill was reiterating this to the House of Commons
Culture Media and Sport Select Committee.

Suddenly, the attitude to debt
has changed. The SEC filing clearly states:

“We intend to use all of our net proceeds from
this offering to reduce our indebtedness”

The
Glazers do not need to take this approach, they could float United and retain
the proceeds themselves. The fact they
have chosen not to do so is very telling and has the potential to transform the
financial position of the club. As I have mentioned again and again on this
blog, over £500m has been spent on interest, debt repayments, fees and
derivative costs since 2005. In the first nine months of the 2011/12 financial
year alone the club spent £71m on interest and bond buybacks. The elimination
or significant reduction of these costs is huge news.

The other key aspect of this debt reduction is that the prospectus makes it clear that there is no intention to pay dividends in the forseeable future. Interest payments will not simply be replaced with dividend payments.

The 2010 bond
issue was supposed to lock in long-term (seven year) funding, and yet only two
years later, that entire costly structure is being ripped up.A major change of heart has taken place.

The family can still cash in some shares under the "over allotment" mechanism

Although the prospectus says all the net proceeds will be used to reduce debt, the family can still sell some of their shares (as opposed to the new shares in the main offer) under the "over allotment" option. This is a feature of many IPOs, whereby the owners make additional shares available for sale if demand is higher than expected. Over allotment is not normally for more than 10-15% of the shares being offered.

At this
early stage we are missing some very key details

The SEC
filing is a “preliminary prospectus”. It contains no details on the number of
shares being issued or the price of these shares. It is subject to revision.

The
success or failure of the offer will have a lot to do with the valuation the
offer puts on United. In the past, the Glazers have appeared to have placed a
higher value on the club than most analysts or potential buyers. The FT recently
reported that Morgan Stanley had left the IPO syndicate (of underwriters)
because of disagreement over the valuation.

It is not
too late for this offer to collapse spectacularly if the Glazers attempt to sell
shares on too high a valuation or if financial markets weaken further. This is
not a “done deal”.

The share
offer will be significantly greater than $100m

The much
quoted “$100m” issue is a red herring. There is a requirement in a preliminary
prospectus to estimate the cost of registration fees and as these are dependent
on the size of the share offer, a “placeholding” assumption has to be made.
That is where the $100m figure comes from. It is not a guide to the size
of the eventual offer. There is little or no point raising $100m (£64m). The
exact amount raised will depend on the valuation placed on the company and the
state of the markets in the next few weeks but I would expect at least $300m.

This is
not a change of ownership

Sadly for
those of us who want supporters to have a meaningful stake in Manchester
United, this IPO is of virtually no use at all. The “A shares” on offer will
only have very limited voting rights. Even if the Glazers sold 90% of the club
in the IPO (which they won’t), the “B shares” the family will hold would still
have a majority of the votes as each B share has 10x the votes of an A share.

Non-Glazer
shareholders will therefore have virtually no influence over the club.

This
remains a very short-sighted and depressing approach to governance. The
experience from Spain and Germany shows that supporter participation in
ownership is a huge plus for football clubs. United’s unwillingness to engage
with supporters as anything other than potential customers remains an enormous
problem that can probably only be solved by intervention by government.

They’ve
chosen New York rather than London because they want to maintain control

The
principal advantage to the Glazers from listing in New York rather than London
is that the A/B dual share structure is acceptable in the US and not in the UK.
Well known companies such as Google, Ford, Facebook and (infamously) News Corporation all have dual voting structures. It would be very hard to float a
company with such diminished voting rights for outside shareholders in London.

The
downside of US listing is the higher tax that the club will have to pay. United
has been UK tax registered for all of its existence but will now be subject to
US Federal Income tax on profits at the high rate of 35% (the UK rate is 28%).
The fact that the Glazers are happy for the club to pay a higher tax rate tells
us a lot about the importance of the A/B share structure to them.

Is this
all about a post Fergie world?

Why is
this all happening now? We can only speculate, but it seems to me that the
Glazers are preparing for a Manchester United without Sir Alex Ferguson. As we
know, the club has achieved great success on the pitch on a pretty low transfer
spending since 2005. Would another “big name” manager come on board with this
limited budget, especially as City, Chelsea, Real Madrid and Barcelona continue
to flex their financial muscles?

What
happens next?

The
underwriting banks and the company will now undertake a road show for potential
investors. United have ninety days from the date of the preliminary prospectus to
file their “final prospectus”, which includes the price and number of shares
being offered. The IPO can still be cancelled at any time prior to this….

52 comments:

Anonymous
said...

Hi Andy

Although this is great for the club and I welcome it with open arms I can't help thinking this change of heart has nothing to do with helping the club compete against other top clubs in the transfer market, but just a way of them being able to take dividends out of the club without putting the club in financial trouble.

The cash flow at the club is not that bad Andy as you well know and it will be improved significantly with the new TV money. So the Glazers could easily buy Hazard, Kagawa, Moura etc and pay the £45m annual interest, at least until they needed to refinance in 2016. The only thing they couldn't do is pay interest, buy top talent and take dividends. So for me the reason they are doing this is so they can take dividends from the club.

On the point about "do shares with almost no votes and no dividends have any value?", I wrote this on a forum yesterday to someone who took that view:

"there are plenty of academics who would agree with you. If you don't get votes or dividends what have you got?

The only problem with concluding that is that world doesn't agree with you, because as I write this Google A shares are trading at $587 each and they have 1 vote compared to each B share's 10 votes and they don't receive dividends.

You and I may conclude they have no real value but if I had 2,000 of them I'd be a millionaire....

You mentioned about selling up. Do you think there is any particular reason to why we have given Powell and Kagawa just four year deals as opposed to the usual five year deals? Could this have any indication to when they may want to sell up or is it just me being suspicious :)

The prospectus rules out dividends for the FORESEEABLE FUTURE. Does that not give them the option of taking dividends after 12 months? And could these potentially dwarf the £10m consultancy fees they currently get now?

call me cynical but my first thought when i heard about this IPO las year was 'fergie is leaving'. to me it seems the glazers like most of us believe only fergie can keep the club aboe water with the current budget. i also believe the arrival of city was a game changer that has put wrench in the glazers plans. the FFP was a last line of defence( we have been the club that has pursued it most relentlesly) but looking at what fergie and gill said 2 months ago, they seem to have doubts about it. a struggling united on the pitch is of little value to the glazers. in a post fergie era if united were struggling to get into europe they would loose have the worldwide fanbase within 5 yrs i have no doubts about that.

1. as have been pointed out, many companies don't spin out dividends. Most high flying tech companies don't (MSFT and AAPL have only started doing so in the past few years as they sit on literal mountain piles of cash/cash equivalents). To hold stock in these companies is to hold the belief that the stock price will appreciate so that your gains will be realised when you sell the stock forward. It is really not that big of an issue.

2. while it's true that the top line tax rate for a US corporation is 35%, however, between 2008-10, the effective tax rate for a Fortune 500 company is in actuality 18.5%. I'm sure it's much the same in the UK (though I obviously can't speak with any specificity to that).

3. the real shame and what would put a real damper on this stock issue, as you rightly point out, is the dual voting structure. For a tech company with "visionary" leadership (like GOOG & FB), a case could be made that the wisdom of the market is not going to be better than the CEO but surely such an analogy could not be made here.

Since most stock issues rely heavily on institutional buyers (who generally frown upon such dual ownership structures), the Glazers and their bankers are obviously banking on the flash name of Manchester United to drive up interest from retail investors.

The main problem here is going to be the Glazer's valuation. If they're over ambitious it would not surprise me to see this whole thing collapse.

As it is, hopefully we'll raise at least £150 Million and reduce our debt to nearer £250 Million, at which point I suspect a decent few years in the Champions League, big up front payment from Nike on renewal of the kit deal and a similar fee on shirt sponsorship and increased TV deal could see our debt move below £150 million?

On that point, what would you say is a manageable amount of debt for us to remain competitive post Sir Alex and when do you think the club will reach this level?

I understand your suspicions of what the Glazers say, but I can assure you, they wouldn't PLAY DOWN the prospects for paying dividends. They don't give a toss what supporters think... If there was any realistic prospect of paying dividends in the near future they would say so. It would make selling the shares a lot easier.

Hi AndersWhy the rush to IPO? A look at the fundamentals doesn't suggest any immediate need to IPO. Anything in RF LLC, Delaware to prompt this?Would the SEC have to notified of any contingent debt within the Delaware LLC?

The Fergie angle is certainly a goer- though I found the prelim. prospectus masterful in how it downplayed his significance. Seemingly, all investors need to know is that he joined in 1986 and the next guy might not be as successful and now on to those pesky earhquakes! If I were seriously thinking of investing, the very first question would be: Why haven't ye signed him up to a long term contract? The next: Where can I run a short on his retirement?

Thing is: if we remove the indebtedness and the dividends, then the club will have 100+m pa to reinvest. CT will need to be paid but I presume the club will use previous losses to reduce the tax burden during the next few years. So where is the surplus going?Unless they relax the 50% wages/ turnover cap we are shaping up to be cash rich for no apparent reason. Perhaps they have a risky expansion plan in mind that they'ed prefer not to disclose at this time. In any event, Class A shareholders will have absolutely no say in future plans.

The Bond was pointlessly expensive. It looks like Feb 1 2013 is penciled in for its removal- only 3 yrs after issue. swap loss, extra premium as a result of unused carveouts, professional costs, 1 year interest as an early redemption penalty, high interest throughout.... Yeah, that's what you call a successful refinancing exercise.

This Cayman business, what's that about? It seems pass-thru from a CT perspective and may be beneficial from a CG point of view for the Glazers and Class A investors alike. But what about the rights of minority shareholders? Will the club actually hold an AGM?

The idea of United paying a dividend as a red herring seems to be off the mark. There are so many ways with which the Glazers are extracting rents already (like the loans, consulting fees, director's fees, etc).

What the glazers are doing tells us everything about whats wrong in football and the world. Total and utter greed is driving this, the glazers have taken £500m+ out of our club in the pusuit of more millions and some people say they are doing OK. I curse them for tarnishing our wonderful club but what goes round comes round so as Andersred says ...watch this space

Quick question - with a 90 day deadline to file their final prospectus, what is the last day that the prospectus can be filed. And after the prospectus is filed, is their another deadline to float on NYSE?

This is seriously wrong. The Glazers are preying on our loyalty to United. No dividends, less voting rights.. If this were any other company, no one would buy any shares. But because we want to see the best for our club, we take the risk of losing money with very little, if any, gains. I don't know whether to laugh or cry at how outrageous and devious this scheme is.

I, like many others, truly care about this club, so is it wrong to want this plan to fail? I can't stand the idea that there will be many United supporters, because of their dedication to the club, who will buy shares in United taking on board the inherent risk of doing so. All to service someone elses debt. To me this is eerily reminiscent of the GFC when American companies packaged debt and sold it off around the world. Except in this case there are no dividends to rely upon.

There's no requirement to mention anything about the Delaware company at all. You ask why the rush, it could be down to some covenants at the Delaware level on total indebtedness... If they borrow at that level to repay the PIKs they may be required to reduce group leverage or pay a penal rate (that is, after all, exactly what happened with the PIKs themselves).

The lack of mentions of SAF must be because they are trying to play down his importance. He barely gets six mentions in the whole filing!

I agree that with no dividends and less interest the cash flow will be very strong. Will they really spend it all on players....? Uncharted territory.

You are so right about the bond, a massive waste of money. They could have run with the bank facility and saved millions. Don't forget the premia paid on £95m of bond buybacks too...

Maybe Cayman is just a way of avoiding people like me turning up at an AGM! I hadn't thought of that. As you say, there's no current tax advantage.

The Glayzers decide to push with the IPO because if it's a success and they repay the debt then, it would probably be at the cost of 15-30% of their shares and they would convert a burdened club to a one which makes £100 mil per annum (even more with the new media deals, commercial expansion, etc).

I am not quite a financially educated but it seems to me that the move to the Caymans indicates that the Glayzers are preparing for substantial annual profits, which would be hijacked by the corporate taxes in a non-tax-heaven country?

After they get to the point where they repay the debt and start making those profits, the shares price should sky-rocket and that would benefit the investors?

Andersred, firstly I must pay testament to your blog. I applaud the fact that you give United supporters (I am not one) a view if the club as a business, not just a team and you pitch (no pun intended) at the right level.

I urge caution at your optimism though. The prospectus quote you supply has two glaring words in it - intend and reduce. This is no statement of sureity nor one of debt settlement. Given their share preference plans I only envisage more of the same for United supporters, which is a shame as you should all be surely permitted to own a part of the club you see as majestic and devote yourselves to.

A pure cash grab for the Glazers. As Matt said- "preying on supporters' loyalty to United." If the share price drops- it's no skin off the Glazers' back, as they'll have already fleeced the suckers. If the shares rise- it will merely indicate that there are more suckers than they originally expected, so they'll just keep floating secondary public offerings until they've squeezed out every available penny.

Can you explain why the prelim prospectus states that the bonds will be redeemed at approx 108.5%, the redemption terms applying from Feb 1 2013? Isn't there the option to redeem up to 35% of the bond, at par, with the proceed from an equity offering provided that it occurs before Feb 2013? This option would seem to be up to 15m cheaper.

Hi Andy,Reading the terms of the NYSE IPO leaves me depressed and cold. It's not about ManYoo's future soccer domination but rather a bunch of bleeding bloodsuckers' intention to extract maximum value out of a historical declining asset that is ManYoo.Like you, I am perplexed by the about turn from Asian capital markets (HK & S'pore) to the US (NYSE). Slowly, I started to see the reasons why the shift occurred. It's about predominantly two things - control & high valuations. ManYoo listing in Asia would have significant attraction since Branding is extremely strong in Asia and Asians are obsessed with Premiership soccer. As you have pointed out, London does not allow diminished voting rights or dual voting structures. Likewise in HK and S'pore - historically they were UK colonies & adopted the UK style for their capital markets. Without A/B voting structure possible in Asia, the only other mechanism to extract value without ceding control is to have very high valuations. In this case, the underwriters are the self regulating authority. It's their self-interest to ensure that Big IPO should not be overpriced as they have to 'eat' any unsold tranches when it goes to market. This would impact on their firms capital, liquidity and overload their treasury. Perhaps, the high valuations were the deal breaker in Asia for the underwriters.Another point I like to add is that the tax regime in both HK & S'pore is very favourable (16.5% & 17% respectively) compared with UK (28%) and US (35%). This again reinforced the belief it is not about the club but rather the interest of owners of the club (screwing the fans worldwide). The NYSE proposal would be probably the last resort to fleece unsuspecting and not too sophisticated investors but it is kind of ironic given NYSE is a leading financial centre. The A/B shareholding structure plus no dividends will be paid for the foreseeable future leaves a 3rd element missing (price). It is kinda hard to value this share via traditional valuation means (P/E ratios). The only relevant valuation for the IPO is the zero-coupon bonds method but the price has to be severely discounted at present value in order to mimic the cash payouts of a traditional bond. Another element to consider is the future if shareholders are to realize capital values or losses. Using Arsenal and their self-financing model as a guide, capital values will be bleak - high priced tickets to extract value from disillusioned fans; trophy-less years; declining commercial value due to on-field performance; management fees to bypass the no-dividend policy; selling of impact players to richer clubs; reluctance of emerging players to sign extensions, etc. Already we are seeing emerging young players huffing off even before making the 1st team - Ravel Morrison, Paul Pogba, Ezekiel Fryers. Likewise, we're missing top talents like Eden Hazard, Jordi Alba, etc. Looks really bleak plus SAF will not be forever in ManYoo.Really really pissed with the Glazers - they're not passionate soccer people - just a bunch of bloodsucking Yankees - asset strippers, value suckers, debt loaders - who just messing with an iconic institution for their own selfish benefits.Cheers!

Is it just me?The Glazers are going through a lot of trouble and effort at Manchester United just to make money for their debt holders and investment bankers - over £500m has been spent on interest, debt repayments, fees and derivative costs since 2005.

If I'm in it for the money, I'll sell out to the highest bidder (sic. Qatar) for significant capital gains and extinguished my debt burden ASAP. Looking at it from a Property Investor's point of view, the use of high debt is OK as long as the rental yield and capital values on the property appreciate faster than the cost of debt. Once that pinnacle is reached, then selling out is the logical option before earning capacity becomes reduced or even impaired. Using debt as a tool, one should not "hang on" to debt cos if the situation changes, the debt can be a hangman's noose. It is always a short term solution.

Looking at the Glazer's position, they should have sold out last season 2010-2011 when we're Champions 2 years in a row/Champion's League finalist and also the economy seemed to recover from the 2008 GFC/before EuroBloc full meltdown.Methinks that the commercial side of the business has reached full potential while if the broadcast revenues remained on a shared basis in the Premiership unlike La Liga model of individual negotiations - there is no added value to Manchester United.

From Brian:"The Bond was pointlessly expensive. It looks like Feb 1 2013 is penciled in for its removal- only 3 yrs after issue. swap loss, extra premium as a result of unused carveouts, professional costs, 1 year interest as an early redemption penalty, high interest throughout.... Yeah, that's what you call a successful refinancing exercise."and from Andy:"You are so right about the bond, a massive waste of money. They could have run with the bank facility and saved millions. Don't forget the premia paid on £95m of bond buybacks too..."The Glazers seemed beholden & influenced by their bankers. The PIKs, subsequent bond issue - all enriched the debt holders & investment bankers immensely at the expense of Manchester United. The Glazers seemed not to care even though they are the risk holders if the whole structure fails. This attitude reeks of the cause for the 2008 GFC - Too big to fail.

Well Done again Andy on an Informative piece of Work.In Previous Years you have written Extensively about the Glazers Other Business Interest Primarily the First Allied Corp. Was wondering what is the Current State of that Business given the on going decline in property sector State side?

I'd posit that the new ManCity ownership situation was a real gamechanger.

How much additional costs were created by the new Rooney contract? If there hadn't been a ManCity nearby trying to seduce Rooney, MUFC would have been able to save 20 millions over the length of that contract I would estimate. So, just the existence of a richer club drives up costs.

A capitalist club like MUFC either has to offer higher, competitive contracts even for players who are still signed for 3 more years or see the player getting grumpy or have to sell him.

So, just the same things MUFC have been doing to clubs like Spurs over the past two decades. Karma.

Would've thought the type of investors they'd prefer would be those who can afford to sit on their stake without pressure for dividends.

Doesn't seem a particularly surprising notion that they may well be planning for life after Fergie, but suggesting this has anything to do with bribing a big name manager to take the job seems more in keeping with the thinking in the summer of 2005, and appears to ignore the success United has had in between.wouldn't be surprised if a big name does takeover, but I'll be far less surprised if the next manager is someone with connections to the club or a young up and comer who's shown exceptional talent rather than a name for the sake of it.

Not sure it's wise to call this move a total change of direction either. Surely it's anything but, with the Glazer still hiding as much of their dealings away as they can, whilst still playing the game like the high level spivs they are in the murky world of high level spivs they share their infection with.

Someone asked "Why the rush?" but I don't think your answer was right Andy. The truth is if they don't do this by September then they would have to wait until the audited accounts for 2012 were available as SEC won't allow IPO with audited accounts that are older than 15 months. These accounts would presumably show the full hit taken by elimination from the CL last season, in comparison to 2011. Most of this would be in Q4 I believe therefore they need to avoid publishing Q4 figures for 2012.

They're trying to hoodwink potential investors and this is the last chance to do that.

This IPO seems like very good news. But why didn't they do this two years ago instead of setting up the bond?

The only advantage of the bond, from the Glazers point of view, is that they don't have to give up equity. But they pay 9% for the privilege. Two years ago they thought that was a good deal, now they don't. Does that mean they are less bullish about growth prospects than they were? Perhaps they have become more realistic about about the prospects for earning big sums of money from internet and mobile phone content? In the past they seemed incredibly optimistic about this.

Manchester United; owned by a Cayman Islands company that won't tell us anything they don't need to. Unbelievabale. That's not what I bought into with Law, Charlton, Best and Busby.

These people are parasites, pure and simple. Utter scum. Everything they do is for their financial benefit, nothing is for United's, bar the impact it will have on the Glazers finances.

The fans? Individual cash machines to be stripped bare and the moment they stop churning out cash to the family, they are to be scrapped and replaced, with not a moments thought towards how long such a fan has been a Red.

Well yes. Edgar contain other submissions from the club. Exhibit 99.4 is Edward Woodward's explanations (to the SEC) as to why the company can't produce audited statements "not older than 12 months". They are:

1) We wouldn't have to do so elsewhere (Quite funny as explanations go).2)Undue hardship.3)they'll be available in September 2012 in any event4) we hope to have the offering completed soon and thus the audited accounts will not be older than 15 months old.

I will head the horse off at the path per say Andy and state that I have followed you for years and also have heeded Duncan's advice and calls to action, along with all the other voices emanating from the LUHG,SU,MUST, IMUSA, etc camps from 2004 onwards.I slagged you down royally quite recently for the simple fact and correct me if I am wrong, in your view this is good for United basically because it will be some ill advised investor that will take on some of the burden, replacing match going reds as the cash cow that will feed the next couple of years of debt.which reads as US investors can at their own peril buy these offerings to ease the Burden on the Glazers bottom line, but your season ticket renewal cost this year stays stable ... more fool them??? you're all right Jack! a few quid saved yes?

Thousands of loyal reds decided not to pay one penny with head held high and walked away by not renewing. a personal decision with little consequence on anyone other than their own personal pride and commitment to a principle.What i dont understand, and yes Ive confronted many with te same question...When was it the accepted policy for any anti glazerite to, at such a juncture to abandon the principle of fighting for a fan owned club at the expense of fucking over innocent, granted ill advised/informed US investment bankers, under the guise of " more fool them"? let them carry the burden?

Some of us fought tooth and nail in the open with the principles and objectives installed in us by you all that has sadly dissipated when there is an easy out.

What do you make of the Red Football Junior Limited listed in the prospectus? They are consistently mentioned in terms of the debt, such as:

"Our senior secured notes consist of two tranches: £250 million 83/4% senior secured notes due 2017 and $425 million 83/8% senior secured notes due 2017. Our senior secured notes were issued by our wholly-owned finance subsidiary, MU Finance plc, are guaranteed by Red Football Limited, Red Football Junior Limited, Manchester United Limited (UK) and Manchester United Football Club Limited and are secured against all of the assets of Red Football Limited and each of the guarantors. The proceeds of our senior secured notes were used to refinance existing debt, reduce Red Football Limited's liabilities to its hedging counterparties, pay fees and expenses related to the offering and for general corporate purposes."

As owning 28% of Manchester United Limited (UK) broken out from the 72% that comes down more directly from the rest of the layers of holding companies. Manchester United Limited (UK) appears to be the top of the operations side of companies before we get into the holding companies. So in a sense that 28% is a piece of the true value (the football operations) of the house of cards, and quite possibly first in line if things further up the tree go south.

Any thought that this 28% relates to the Great £249.1M PIK Mystery, along with other mysteries of the Glazers financing?

"As we know, the club has achieved great success on the pitch on a pretty low transfer spending since 2005."

If we paid for Kagawa et al in June, our total cash spend on players since the takeover will be £312 million - compares to £188 million in the 7 years before the takeover. Our spending has only been "pretty low" if you are comparing it to City and Chelsea - in the context of how United has been run historically, spending has increased significantly since the takeover. Of course it would be nice to have more to spend - although, as SAF doesn't seem to have spent as much as was available for a few years now, availability doesn't mean that the muppets' dreams will come true.

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